The Securities and Exchange Commission has proposed a tailored cryptocurrency custody framework that would allow registered investment advisers and regulated funds to hold crypto assets directly when a permitted custodian is unavailable. The proposal, unveiled October 1, aims to modernize safekeeping requirements under federal securities laws that predate the internet era.
Under the proposed framework, advisers would retain control over private keys on customers' behalf, while regulated funds—including registered investment companies and business development companies—would maintain their holdings through their adviser subject to compliance requirements and board oversight.
Security and Oversight Safeguards
Eligibility for direct safekeeping would require quarterly reassessment, with security systems undergoing reviews at least annually. The proposal mandates that transfers require authorization by at least two people, and each customer's holdings would occupy separate blockchain addresses. Investors would receive quarterly statements and sign agreements treating the tokens as financial assets under applicable state law.
State trust companies, chartered by state banking regulators, could also provide outside safekeeping subject to initial and annual checks of their authorization and security policies. Advisers and funds would review audited financial statements and internal control reports, with customer holdings maintained separately from the custodian's own assets.
Additional Regulatory Changes
The proposed amendments extend to financial statement audits for registered investment advisers and broker-dealer custodial services for regulated funds. Advisers taking direct custody would obtain an independent accountant's internal control report within six months and annually thereafter. The package also includes updates to recordkeeping and disclosures, including conditional use of blockchain records and reporting on tokenized fund shares.
The SEC will accept public comments for 60 days after the proposing release appears in the Federal Register.
